The U.S. Federal Reserve Bank Board Chairman Jerome Powell recently addressed reporters following a meeting of the Federal Open Market Committee (FOMC). The lack of improvement in inflation data during the first quarter of 2024 is anticipated to postpone a potential first interest rate cut from the FOMC until at least July, and possibly later.
Monthly Consumer Price Index (CPI) data for January, February, and March indicated that achieving the FOMC's 2% annual inflation target may not be straightforward. Despite an increase in headline CPI on an annual basis since January 2024, disinflation persists when food and energy prices are excluded, albeit possibly at a decelerating rate. In March 2024, the headline annual CPI inflation stands at 3.5%, while it is 3.8% when food and energy are excluded.
Fixed income markets currently show minimal likelihood of an interest rate cut by the FOMC at its upcoming May meeting, with only about a 1 in 4 chance of a cut in June. The markets now predict that the first cut is most likely to occur in July or later, with a slight possibility that the Fed may not cut rates at all in 2024.
While Fed officials previously projected two or three interest rate cuts in 2024, the recent CPI release has cast uncertainty on this forecast. The FOMC policymakers have indicated that they believe the current interest rates are likely at their peak, but they are closely monitoring economic data for any necessary adjustments.
Although the job market in the U.S. appears relatively healthy based on the most recent employment report for March, concerns about a potential economic slowdown could prompt the FOMC to consider rate cuts. The FOMC's dual mandate of managing inflation and supporting employment will play a crucial role in their decision-making process.
As the Fed continues to observe inflation trends and assess the strength of the job market, the expectation for interest rate cuts in 2024 has been pushed back due to limited evidence of further disinflation. While the FOMC is still anticipated to implement rate cuts this year, the timing and frequency of these cuts may differ from earlier projections.
